Why New SEPA CSMs Add to Confusion

To judge from speeches at this year’s SIBOS in Boston, the industry’s SEPA programme has some immediate challenges:

• Ensuring individual banks can send and receive the Core&Basic SEPA Credit Transfer (SCT) from 28 January 2008.
• Ensuring that each bank can nominate a clearing and settlement mechanism (CSM) through which an SCT can be delivered to it, and into which it can deliver an SCT.
• Ensuring that an SCT delivered to CSM #1 but destined for a bank connected to CSM #2 can be routed by CSM #1 to CSM #2 and then finally by CSM #2 to the destination bank.

The policy has been to lower the entry barriers to SEPA clearing from demanding PEACH capabilities towards defining multiple types of CSMs: a single bank could qualify on its own. This policy will have many benefits in terms of the long-term competitive environment, but its current manifestation may hinder the industry in getting to the start line, by adding to the complexity of the spider chart.

An initial and workable structure for 28 January – given where the industry is at today – would consist of:

• A local aggregator for each Euro-In country, such as IBERPAY, STET, Equens and SIBS, interfacing to and between local banks on the one side, and to EBA STEP2 on the other.
• EBA STEP2, to take in traffic direct from its members and distribute it, and to act as the hub for the local aggregators to send and receive their cross-border SCT traffic.

Banks could achieve reachability with one interface – to their local aggregator or to STEP2. Local aggregators only need an interface to STEP2 to have an interface with all other aggregators. Note that Equens could act as local aggregator for more than one country and logically would switch Germany-to-Netherlands traffic across its own books and not into STEP2.

Banks in Euro-Out countries of the EU and in EEA countries should also be looking at STEP2 as their default routing, again so as to simplify everyone’s spider chart.

The corollary benefits of this approach are clear:

• Version control – STEP2’s interface definition establishes one authoritative version of the Core&Basic SCT. Notwithstanding EACHA’s efforts, there is a risk of divergence if there are multiple direct linkages.
• Testing – the hub-and-spoke approach is far easier to test.
• A testing programme with STEP2 as the anchor ensures the distribution of the authoritative version down the chain.

Running contrary to this approach we have a line of new CSM initiatives spearheaded by combinations of consultancies, vendors and Euro-Out ACHs. A key marketing tool is to stimulate corporate interest in new services and use that to put pressure on the banks – at a time when they under quite sufficient pressure already.

Corporates are being encouraged by the vendors to think that these new services are realistic when in fact:

• National migration plans show no certainty that the big domestic volumes of credit transfers will switch from a legacy basis to a SEPA basis by 2010 or soon after – if ever.
• The SEPA Direct Debit cannot be launched until the Payment Services Directive is in effect in all euro countries – that means November 2009 at the earliest.
• Corporates are not ready to adopt XML themselves; SEPA is seen as a possible facilitator but not a main driver for their aims.

A closer inspection of plans for these new CSMs demonstrates certain shortcomings:

• The CSM’s main function is as a bridge between banks and other CSMs (mainly STEP2).
• The CSM may not carry out either the clearing or the settlement actions and so their intervention lengthens the payment chain and reduces efficiency.
• The CSM would replicate the many existing links to these other CSMs that banks already have, so the new CSM is a switch, and not a vital one.
• The industry has current overcapacity in the CSM space and this is just adding to it.

The publicity of these CSMs includes the claim that they will be a banking club. This is where it cuts into IBOS territory and is of concern because we need it to be crystal-clear what kind of arrangement constitutes a banking club. Otherwise the value of a proper banking club will be diminished.

A CSM of the type being widely publicised at this time cannot be a banking club because:

• It is composed of competitors.
• The banks do not believe themselves that the CSM is a platform for them to pursue common interests.
• The banks have not reached an agreement to exploit the CSM to deliver common services under common business rules and messaging to a defined customer set, each bank being responsible to take the offering to a defined marketplace.

So in all respects it would be better if these new CSMs held off until the local aggregators and STEP2 have enabled all banks to connect and exchange the Core&Basic SCT, via a model at the centre of which sits STEP2.

This would establish a baseline scenario in which all the important players (the banks) are connected, albeit at a modest level of functionality and with only a proportion of cross-border traffic going over it.

That, nevertheless, is the banking industry’s contract with the European Commission and European Central Bank for January 2008; it has been pointed out and accepted that SEPA is not a ‘big bang’.

Delivery on the contract poses significant short-term challenges and these are not reduced by interventions that complicate delivery. Such interventions are not doing a service to the banking industry at this time.